Chevrolet Volt: Bad Capital Budgeting

By most accounts, the Chevrolet Volt has been a dismal failure. Year-to-date, Chevrolet has sold just 13,500 Volts, well below the 40,000 cars that GM had projected for 2012. The car's $39,995 base price, along with long charge time, has not helped sales. Of course, reporting on the Volt's financial results can be as weak as the car's sales. For example, as the article notes, it currently costs GM between $75,000 and $88,000 to build each car, including development costs. GM spent between $1 billion and $1.2 billion in development and tooling costs, or just under $56,000 per car sold since the model's introduction. In any capital budgeting analysis, such calculation are meaningless for several reasons. One notable reason is the shaky analysis in the first line of the article that implies it isn't a good thing for GM to sell more Volts. The actual cost to build a Volt is estimated to be $20,000 to $32,000, so any sale above that variable cost increases the NPV of the project. One thing the article does point out is that the development of the of the Volt does provide technology that can be applied to future vehicles, a strategic option in green technology.